I am not a big fan of lifecycle funds as I only use one in my entire investments, including both regular and retirement accounts. The reason is the lack of flexibility of such funds. However, lifecycle funds are getting popular among investors who opt to choose a fund of funds to simplify their investments. Among the benefits of lifecycle funds, also known as target-date funds, the most talked about are:

Automatic asset allocation: Asset allocation is adjusted based on the time span of the target date of the fund;

Automatic diversification: Since it’s a fund of funds, the lifecycle fund has exposures in a wide range of asset classes.

With these features, lifecycle funds become an ideal choice retirement accounts since these funds require the minimum amount of management (however, one size doesn’t always fit all). If you like lifecycle funds, then you may find lifecycle ETFs evenly attractive, if not more.

Early this month, XShares Advisors teamed up with Amerivest Investment Management, a subsidiary of TD Ameritrade, to offer the industry’s first batch lifecycle ETFs. Currently, five funds are available for investors:

TDAX Independence 2010 ETF (TDD)

TDAX Independence 2020 ETF (TDH)

TDAX Independence 2030 ETF (TDN)

TDAX Independence 2040 ETF (TDV)

TDAX Independence In-Target ETF (TDX)

All the funds have an expense ratio (ER) of 0.65% and they track respective lifecycle indices developed by Zacks Investment Research (here’s an article on Forbes on Zacks lifecycle indices). Since these funds are very new, no detailed data can’t be found on Morningstar and the funds’ website doesn’t have detailed information such as the fund’s asset allocation either, only a sketchy description on how the fund (TDV) invests:

At inception, TDV has an aggressive allocation to risk-based securities, such as domestic and international equities. Balances move automatically down the risk glide path to arrive at a conservative allocation in the year 2040. As an aggressive fund, the initial allocation will be approximately 24% in international equities, 73% in domestic equities and 3% in fixed income. Balances then follow a glide path, from an estimated 97% equity exposure to 10% in the year 2040. In the five years after the target date, TDV gradually increases its risk exposure to match that of the Lipper Conservative Funds Index. TDV then replicates the Lipper equity allocation (currently 33%) on a static basis, to perpetuity.

As more and more people are using lifecycle mutual funds, the offering of lifecycle ETFs is likely to pick up steam because lifecycle ETFs enjoy the advantages of both worlds: asset allocation and diversification of lifecycle funds and low cost and flexible pricing of ETFs.

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8 Responses to “Lifecycle ETFs”

While I think ETF versions are nice, it’s also bit defeating for anyone who pays a transaction charge. Most people who invest and want to invest in life cycle funds are people who want to “set it and forget it.” Since mutual funds are often free to trade (the right fund at the right brokerage), it’s easy for people to set a contribution amount and forget it. The same could be done with a ETF version, but then the transaction cost kicks in. But I guess if you have commission free brokerage, it doesn’t matter.

My company just put these (the funds, not the ETFs) into effect as an option with in our DC pension plan. The real selling feature is the guarantee on the fund price which is set on a specific schedule. I do not use them but have thought about it – the guarantee would be nice but I am a bit skeptical of these.

What do you mean “the guarantee on the fund price”? It guess such fund is not available in US as I never heard of any fund that guarantees fund price. What’s the return then? Somehow, I suspect the return will be greater than the return determined by the market (though there isn’t any guarantee of the return).

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